Adjudicating while insolvent – the latest in the saga

Over the past few years there have been a number of cases about adjudication by insolvent parties. Last week the High Court handed down another which shows the difficulties companies in administration or liquidation have in effectively enforcing adjudication decisions where there is a cross-claim.

Background

The starting point since the Supreme Court’s decision in Bresco v. Lonsdale in 2020 is that an insolvent company can adjudicate – but whether that can be enforced is another question. Where the insolvent party’s claim has been decided and there is no cross-claim, enforcement isn’t an issue. The problem comes when the paying party maintains a genuine claim against the insolvent party. Such claims are far from rare – when parties become insolvent there is often a trail of loss left in their wake.

The question of whether a decision can be enforced in those circumstances was largely answered in October 2021 by the Court of Appeal in John Doyle v. Erith Contractors, which didn’t go quite as far as to say that a company in liquidation could never enforce an adjudicator’s decision in those circumstances, but showed the difficulties in light of the high level of security that would be required. That case considered another – Meadowside – that had also discussed the necessary security and concluded that what had been offered was inadequate.

Since these key cases, there have been attempts by insolvent companies (and businesses that have sprung up on the back of them) to push the court to enforce awards that have been given in their favour. No doubt some have been successful. And where there is an undisputed sum owing to that insolvent company – i.e. there is no cross claim by the solvent company – it seems right that the misfortune of insolvency should not prevent that party being able to enforce payment through adjudication.

But the converse is also true – it seems wrong that where there is a cross-claim, the solvent party should have to pay on a ‘temporary’ basis given that the insolvency means the prospect of recovery on a final basis is slim-to-nothing. We wrote early last year about a case – JA Ball Limited (in Administration) v. St Philips Homes (Courthaulds) Ltd – that reinforced the issues an insolvent party faces when trying to enforce in the face of a cross-claim by the insolvent party.

Last week’s judgment reinforces the JA Ball case, and the Court of Appeal’s judgment in John Doyle: Malin Industrial Concrete Floors Limited (in administration) v. VolkerFitzpatrick Limited [2024] EWHC 2890 (TCC).

Case background

Malin was a flooring sub-contractor that became insolvent during the defects rectification period of a project. Its administrators then raised a claim for release of its retention, which the main contractor resisted on the basis that it had spent considerable sums remedying flooring defects, and faced the prospect of having to pay out more in the future. Its position was that insolvency law meant that it was entitled to rely on the retention as security for its cross-claim (the defect repair costs and such like).

Malin successfully gained an adjudication decision for payment of its retention. The contractor chose not to advance its counterclaim in the adjudication given the irrecoverable costs that it would incur and the knowledge that as an insolvent company, the award would not be enforceable without proper security (in view of cases such as John Doyle and JA Ball). Malin then sought to enforce the decision – but refused to offer any security beyond a stay on payment while the cross-claim was pursued.

While the offer to defer payment while a claim was brought would have ensured that the sum itself (the retention) was not lost to Malin’s creditors, it did nothing to protect the contractor from the costs of having to pursue its claim. In simple terms, it would have had to spend considerable legal costs proving its claim, none of which – without security – would have been recoverable once it had successfully proved its case because of Malin’s insolvency. As such, adopting the language of the Supreme Court in Bresco, there was “a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company’s claim as security (pro tanto) for its cross-claim”, and in those circumstances the Supreme Court warned that “the Court will be astute to refuse summary judgment”.

Malin’s arguments

Malin’s position was based around a reading of the JA Ball case that suggested security was not required, and a criticism of Lord Justice Coulson’s judgment in John Doyle as a misapplication of the Supreme Court’s decision in Bresco. It invited the court to find for its reading of JA Ball (a first instance decision) and that the Court of Appeal in John Doyle was wrong.

The judge, however, gave this short shrift (with emphasis added):

“There is no sensible reading of that conclusion, in my view, other than that the judge was saying that, but for the natural justice issue, as long as sufficient guarantees were in place for the value of the cross-claim and the costs of pursuing the same, then a 6 month stay would have been imposed to allow the Defendant to put up or shut up”.

The judge therefore declined to follow Malin’s reading of JA Ball – it said its argument that the only reason that decision hadn’t been enforced was a natural justice issue was wrong – and confirmed that the position set out by the Court of Appeal in John Doyle (and other cases) was applicable. In summary, that is that the insolvency regime trumps adjudication enforcement and that an insolvent company is not entitled to recover monies on the basis of a provisional adjudication decision in circumstances where there is a continuing set-off and crossclaim.

The judge also agreed with the contractor that the crossclaim in this particular case had not been determined in the Adjudication – had it been, it may have strengthened the case for immediate enforcement. He concluded that “the decision in this case was not deciding the net balance between the parties after consideration of any cross-claim and therefore that that potential circumstance for summary enforcement without more falls away in any event”.

As such, the judge did not award the time-limited stay sought by Malin, but rather an indefinite stay with permission for Malin to apply to lift it if after 3 months it was not satisfied that the crossclaim was genuine or in excess of the adjudication award. This was, in the judge’s view, a necessary balancing act given his concern that “no encouragement should be given to any party to attempt to use insolvency tactically as a shield to avoid proper payment of an adjudicator’s award”. In essence, it gives Malin the chance to consider whether it really believes it has a defence to the claim – putting the onus on Malin and its administrators to make an application rather than on the contractor to commence a claim (and spent money on that). And on the substance of the crossclaim, the judge also noted after considering the evidence in support of the claim that “there is sufficient evidence to raise the substance of the potential cross-claim from merely bare to real (as opposed to fanciful), to use terminology familiar to those engaged, for example, in setting aside default judgment applications”.

The end of insolvent companies adjudicating?

This is yet another blow for insolvent companies seeking to seek a quick win through adjudication. Although it doesn’t create any new law on the primary points, instead applying the authorities of John Doyle and Bresco, it puts an end to some doubt that had been sowed as to the effect of certain comments in JA Ball.

As noted above, there will doubtless be some cases where adjudication remains appropriate – but that will only generally be where there’s no contested counterclaim or set-off from the solvent party.

Where there is a genuine claim, this case confirms what had previously been held in John Doyle and JA Ball (despite Malin’s belief to the contrary): the insolvent party will need to provide adequate security for the costs of the solvent party pursuing its claim as a condition of being able to enforce its adjudication award. Parties with a genuine claim will need to show a suitable level of evidence to demonstrate that it has not been dreamt up only to avoid payment, but the threshold for that (in accordance with well-settled insolvency law is considerably lower than proving a claim on the balance of probabilities.

That is good news for parties with genuine claims against insolvent parties: they should not feel bullied into sacrificing that genuine claim because of a threatened adjudication, at least without proper security being put forward by the insolvent company or its backers. It also feels entirely logical – why should an insolvent party be able to get a payment on the back of a temporarily binding adjudication award  in circumstances where the other party wouldn’t be able to recover any overpayment because of the insolvency?

However, this may not be the end of these cases. As mentioned, over the last few years we have seen numerous attempts by insolvent companies and those that act for them to carve out a way of insolvent companies enforcing adjudication decisions, so despite the increasingly clear guidance from the courts, there may be yet further attempts in the future. If those attempts are made against your company, please get in touch – we have considerable experience in the area.

Archor acted for the contractor in this case, Oli Worth instructing Luke Wygas of 4 Pump Court.